Analyst Opinion – We are on final countdown for the launch of the Palm Pre which was the device that easily took the entire buzz from CES this year much as the iPhone initially did a few years ago. In addition, Microsoft has launched an in-your-face competitive ad using a financial argument to drive on Apple’s inability to do a subscription music service. This ad would have likely been vastly more powerful before the Slacker service was available on the iPod Touch and iPhone. This ad campaign comes in advance of what is expected to be the killer Zune, a product that bridges the connected Xbox experience with a music player.
Had either company rolled a product like this earlier they likely would have smashed Apple, but Apple has consolidated their position and many of their initial vulnerabilities have gone away over time. Let’s talk about what it would take to win in a market dominated by a larger vendor.
Embrace, Extend, Extinguish
What I find interesting is that if you were to research which of these three companies was historically more successful with a battle like this you’d end up with Microsoft. They developed early on a strategy the market called “Embrace, Extend and Extinguish” and used it to initially dominate the PC market. However, over time, they forgot how to play this game, but at least one group seems to be playing this game again. That group is their Open Source organization and they have little to do with this device-oriented segment.
How this strategy works is that you first become plug-compatible with the vendor you are attacking and then provide more value more quickly than that soon to be ex dominant vendor can provide. This is how Microsoft took control of the Office productivity market and took it away from vendors like Lotus.
But, to do this with the iPod/iPhone, you’d have to bridge music, accessories and increasingly applications. This last on is still not widely used, so Apple is relatively weak compared to how they will be in a few short years. But things clearly aren’t getting any easier.
If they can’t do this they have to go after unhappy iPhone and iPod users or those that don’t already have one of these devices. This is a much tougher path in terms of assured success, yet this is the path both Palm and Microsoft appear to be on.
The Palm Pre will run against the third generation iPhone, which has likely been redesigned to better compete with this new offering. The Palm Pre is launching on Sprint, which has aggressive service pricing, but is one of the least liked of the carriers in the US. The exclusive is a short 6 months, but that takes it out of the holiday season and gives Apple a slight advantage because AT&T is vastly larger. Verizon is the preferred carrier and once Palm can move there, you would expect their sales opportunities would increase.
Unlike the iPod, the accessories used by the iPhone are not as much of a lock-in and AT&T generally promotes other phones over the iPhone as a matter of practice which means many iPhone users who are chasing the latest technology may be more willing to move than their iPod-owning counterparts.
Finally, the application store side of the Palm offering is very immature and lacks the depth of either the Apple or the weaker Android application store. I’ve played with the Palm Pre several times and it is vastly better than the second generation iPhone but the third generation should close this gap and we won’t know for sure until it shows up and we know how buggy this rushed response to the Pre is.
The Palm Pre’s best shot is likely in 2010 when they can move to other carriers and can fill out both their accessory and application stores to create a more compelling offering.
I’m intrigued by the idea of an Xbox Zune and had this come out two years ago it likely would have done a lot of damage to Apple’s leadership position. However, the iPod Touch and iPhone now run a number of games themselves and this is one of the bigger features driving the phone at the moment. With games it is all about content and, I have to admit, that some of the initial game content on these Apple devices is both interesting and fun. However, Apple has never really understood gaming, Steve Jobs supposedly thinks it is stupid (and that from a guy that once did a project for Atari).
Microsoft gets gaming and the Xbox has actually performed reasonably well in the market and still eclipses the Sony PlayStation 3 in almost every category and has richer games than the very successful Wii.
However, the iPod market has been around for a long time and people are invested heavily in the DRM protected songs and hardware accessories. This will make it much more difficult to move out of the gaming focused buyers and into the media mainstream. So, if successful, would an Xbox Zune take a lot of market share? Yes, absolutely, but not enough to be capable of challenging Apple for the lead, at least not for several years. They could win a month or even a quarter, depending on how much advertising they do and how good the games are. One advantage is the market could see the iPod as old and the Xbox Zune as something new and trendy. The CE market has historically been very fickle and Apple has been the only exception to this. Exceptions don’t last forever.
Like they do with the Palm Pre, Apple is rumored to have a large screen iPod coming to partially address this risk but they don’t yet have a strong game library and Microsoft has had several games that have made blockbuster status over time.
Wrapping up: Apple holds for now
So much is unknown about everything but the Palm Pre that even suggesting Apple can be dethroned would be difficult to defend. However, there is an opportunity for both Palm and Microsoft to do significant damage to Apple. Palm’s big opportunity comes when they move from just Sprint to a variety of carriers early next year and Microsoft’s comes if they execute with a Halo-like game on top of the device, which must be well marketed into the critical fourth quarter.
Both vendors could sting Apple badly this year, but only Microsoft is in a position to possibly do critical damage. To do that, they would have to execute better than they have in years and the odds of that are long. All of this will make for an interesting next few months because all of these products should be in market by the end of September.
This suggests you may want to wait shopping for something in this class so you don’t have an “oh crap, if only I’d waited” moment.
Rob Enderle is one of the last Inquiry Analysts. Inquiry Analysts are paid to stay up to date on current events and identify trends and either explain the trends or make suggestions, tactical and strategic, on how to best take advantage of them. Currently he provides his services to most of the major technology and media companies.
The opinions expressed in this commentary are solely those of the writer.